Bond Fund Outside IRA: Reinvest Dividends?

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Van
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Joined: Wed Oct 27, 2010 9:24 am

Bond Fund Outside IRA: Reinvest Dividends?

Post by Van »

Most of the discussion involving bond funds deals with bond funds inside an IRA or other tax advantaged account. It seems "everyone" recommends reinvesting dividends. This apparently tends to offset and smooth out the total return of the fund as NAV fluctuates over time due to, for example, changes in interest rates. So, as I understand it, if you hold the fund long enough, the return will be largely dependent upon the fund's yield and not so much changes in NAV. I think "long enough" is roughly the duration of the fund, but I am not at all sure about that.

If I have any of the foregoing correct, is it the same for a bond fund held in a taxable account? In a tax advantaged account, the dividends are reinvested at "full value", i.e. without being taxed. Of course, this is not true with a taxable account. It seems that would greatly mitigate the value of reinvestment. Also, reinvesting within a taxable account means a relatively small number of additonal shares being added each month. One does not have to deal with the book keeping in a tax advantaged account, but it is kind of a pain in a taxable account. Yes, Vanguard or whomever will keep track of it for you. However, if you are a belt and suspenders guy like me, you like to have a "hard copy" in your own files.

So, would you reinvest dividends in a bond fund in a taxable account, or would you have the dividends sent to a money market fund for some future expenditure and investment?
mhalley
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Re: Bond Fund Outside IRA: Reinvest Dividends?

Post by mhalley »

I prefer to not reinvest stock or bond funds in taxable accounts. This makes taxes a little simpler, ie not as many tax lots, plus allows adjustment of aaa, plus prevents problems with tax loss harvesting.
Topic Author
Van
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Joined: Wed Oct 27, 2010 9:24 am

Re: Bond Fund Outside IRA: Reinvest Dividends?

Post by Van »

mhalley wrote: Wed Aug 05, 2020 4:18 pm I prefer to not reinvest stock or bond funds in taxable accounts. This makes taxes a little simpler, ie not as many tax lots, plus allows adjustment of aaa, plus prevents problems with tax loss harvesting.
That has been my approach as well, but I'm thinking about reinvesting dividends at this point. My main argument for doing so is that it will, over the long haul, smooth out changes in the value of my investment due to rising interest rates, if that should happen going forward.
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22twain
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Re: Bond Fund Outside IRA: Reinvest Dividends?

Post by 22twain »

Are you still contributing to this fund? If so, you could turn off automatic reinvestment and add the dividends to your contributions.

I have a bond fund in taxable, but I'm retired, so I simply spend the dividends, along with selling shares occasionally.
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BolderBoy
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Re: Bond Fund Outside IRA: Reinvest Dividends?

Post by BolderBoy »

Van wrote: Wed Aug 05, 2020 4:12 pmSo, would you reinvest dividends in a bond fund in a taxable account...
No.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect
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